​​​Befriend MIPs for post-retirement planing

Retirement planning has become unavoidable, with living expenses going up every day and new generation nuclearisation of families. While people are warming up to the thought that equity plays an integral part of retirement planning to generate an optimum retirement kitty, the asset class can also play a supporting role during post-retirement.

Sample some of the tools available:

1) The average life expectancy in India is rising and is currently at 68 age . It is expected to go up considering the improvement in medical care in the country. Comparatively, life expectancy in developed countries is significantly higher at 79-84 age. If India converges the developed standard, a typical retiree at the age of 58 may still have period of 21-26 years, thus giving a long investment horizon (precursor for investing in equity).

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2) The second point is a fall back of the first, i.e. with increase in sunset year duration, investments should be able to sustain the extended period adjusted for inflation. Traditional fixed instruments tend to give no or marginal adjusted returns, while equity returns generally supersede inflation.

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Notwithstanding these two points, a retired individual need not invest all money in equities. Instead, equity should play a supporting role (minority share) in the portfolio (20-30%) to generate inflation-protected returns (see case study).

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Monthly Income Plans (MIPs) (Monthly Income is not assured and is subject to availability of distributable surplus) could be good investment option in such scenario. These are debt-oriented hybrid mutual funds, with a marginal exposure to equity (up to 30%). MIPs offer two options - growth and dividend (payout and re-investment).

Case study

As can be seen from Chart 1, a small portion of equity in the portfolio can enable investors to generate inflation adjusted returns in the medium to long term. CRISIL-AMFI Monthly Income Plan Index which invests up to 30% of the portfolio in equity has been used for the inference.

Opt for growth over dividend in MIPs for systematic withdrawals to meet the post retirement needs

Though name suggests monthly income, MIPs are not obliged to offer dividends every month. Dividend pay-outs are based on profits generated by the scheme and are at the discretion of the fund house. Few other limitations in case of debt options are: although dividends declared by debt-oriented mutual funds are tax-free for investors, the fund house does deduct the dividend distribution tax (DDT) and date and amount of the dividend payment might not be in line with the one’s need.

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In such case individuals can avail of the SWP offered by MIP funds, under the growth option. Within the SWP, investors can choose to withdraw either at fixed intervals or else, link their redemption with capital appreciation. A fixed withdrawal can be helpful for meet the day to day expenses during post retired life. One can also choose to withdraw capital appreciation after it reaches a target level and keep the capital intact.

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The SWP enables investors to withdraw of a specified amount regularly, thus addressing two shortcomings of the dividend option viz., quantum and timing. Thirdly, SWPs are more tax-efficient than the dividend plans since investors will pay taxes only on the capital gains and not on the principal amount. If the holding period exceeds three years, investors can benefit from a lower tax incidence, due to long term capital gains tax with indexation.

Summing up

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​Disclaimer

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Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.

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